Question Tag: Standard Costing

Search 500 + past questions and counting.
Professional Bodies Filter
Program Filters
Subject Filters
More
Tags Filter
More
Check Box – Levels
Series Filter
More
Topics Filter
More
  • 10 Marks

MA – Mar 2023 – L2 – Q3a – Standard costing and variance analysis

Prepare a standard cost card for one door using the provided variances and actual costs.

Tsekpo produces strong and affordable doors for the Ghanaian market. The company has been operating for the past five years from its manufacturing base at Tafo.

During the year under consideration, Tsekpo invested in a new information technology system in order to improve its management accounting information. Unfortunately, there have been problems with the software since its acquisition. The standard cost card, which provides details of the standard production cost to make one door, has been lost and the company is unable to prepare its budget for the year ahead.

The Management Accountant has retrieved some information relating to actual costs and variances for the year. The budgeted production for the year was 21,000 doors. Other relevant information is shown below:

Actual Costs:

Cost Element Actual Quantity Amount (GH¢)
Direct material costs (16,200 sq. m) 16,200 sq. m 81,000
Direct labour costs (8,640 hours) 8,640 hours 108,864
Variable production overhead costs N/A 54,000
Fixed production overhead costs N/A 85,200
Variances:

Direct material price variance: GH¢4,050 (Favorable)
Direct material usage variance: GH¢5,670 (Favorable)
Direct labour rate variance: GH¢864 (Favorable)
Direct labour efficiency variance: GH¢27,432 (Favorable)
Variable production overhead expenditure variance: GH¢432 (Adverse)
Variable production overhead efficiency variance: GH¢13,392 (Favorable)
Fixed production overhead expenditure variance: GH¢3,775 (Adverse)
Additional Information:

Actual production was 600 doors above the budgeted level.
Tsekpo operates a standard variable costing system.
Required:
Using the information provided, prepare the standard cost card for the production of one door.

Standard Cost Card for One Door:
Per Unit

Materials price variance
= (SP – AP) x AQ = GH¢4,050
= (SP – GH¢81,000/16,200) x 16,200 = GH¢4,050
=> 16,200 SP = GH¢81,000+GH¢4,050
=>SP = GH¢ 5.25 per square metre
Materials usage variance
= (SQ – AQ) x SP = GH¢5,670
= (SQ – 16,200) x GH¢5.25 = GH¢5,670
=> 5.25 SQ = GH¢85,050 + GH¢5,670
=> SQ = 17,280 square metres
SQ = Total standard materials quantity for actual production
=> need to get standard quantity to produce one unit
= 17,280 square metres / 21,600 units = 0.80 square metres per unit

Labour efficiency variance
= (SH – AH) x SR = GH¢ 27,432
= (SH – 8,640) x GH¢12.70 = GH¢ 27,432
=> 12.70 SH = GH¢109,728 + GH¢27,432
=> SH = 10,800 hours
SH = Total standard hours required for actual production
=> need to get standard quantity to produce one unit
= 10,800 / 21,600 units = 0.5 hours per unit
Variable overhead expenditure variance
= (SR – AR) x AH = -GH¢432
= (SR – GH¢54,000/8,640) x 8,640 = -GH¢432
=>8,640 SR = GH¢54,000 – GH¢432
=>SR = GH¢ 6.20 per hour
Variable overhead efficiency variance
= (SH – AH) x SR = GH¢13,392
= (SH – 8,640) x GH¢6.20 = GH¢13,392
=> 6.20 SH = GH¢53,568 + GH¢13,392
=> SH = 10,800
Variable overhead is applied to products based on labour hours
=> standard quantity to produce one unit = 0.50 hours
Fixed production overhead expenditure variance
= (BFO – AFO) = (GH¢3,775)
= (BFO – GH¢85,200) = (GH¢3,775)
=> BFO = GH¢85,200 + (GH¢3,775)
=> BFO = GH¢81,425
(10 marks)

  • 5 Marks

MA – Aug 2022 – L2 – Q2b – Budgetary control

This question asks for the similarities and differences between a budget and a standard in financial control.

Budgets and standards are very similar and interrelated, but there are notable differences between them.

Required:
Explain TWO (2) similarities and TWO (2) differences between a budget and a standard.

Similarities between a budget and a standard:

  • Both involve looking to the future and forecasting what is likely to happen under a certain set of circumstances.
  • Both are used for control purposes. A budget aids control by setting financial targets or limits for a forthcoming period. Actual achievements or expenditures are then compared with the budgets, and action is taken to correct any variances where necessary. A standard also achieves control by comparison of actual results against a predetermined target.

Differences between a budget and a standard:

  • Budget: Gives planned total costs for a function or cost center, while
    Standard: Shows the unit resource usage for a single task, for example, the standard labor hours for a single unit of production.
  • Budget: Can be prepared for all functions, even where output cannot be measured.
    Standard: Limited to situations where repetitive actions are performed, and output can be measured.
  • 5 Marks

MA – Dec 2023 – L2 – Q2c – Decision making techniques

This question explains why standard costing may not be appropriate in a Just-In-Time (JIT) and Total Quality Management (TQM) environment.

Explain why a standard costing system may not be considered appropriate for the following modern manufacturing environments listed below:
i) Just-In-Time (JIT).
ii) Total Quality Management (TQM).

i) Just-In-Time (JIT):
In a JIT environment, standard costing may encourage behaviors that are contrary to the goals of JIT. The emphasis on standard cost variances might incentivize large production batches, while JIT focuses on reducing batch sizes and minimizing inventory. Standard costing also fails to accommodate the flexibility required in JIT processes, where production is based on immediate demand rather than pre-set standards.

ii) Total Quality Management (TQM):
In a TQM environment, standard costing’s focus on cost control may undermine the goals of quality improvement. TQM emphasizes continuous improvement and customer satisfaction, while standard costing sets fixed targets, potentially causing conflict with the flexible, improvement-oriented approach of TQM. Additionally, standard costing may prioritize cost-saving over quality enhancement, which is a key driver in TQM systems.

  • 3 Marks

MA – May 2018 – L2 – Q5b – Standard costing and variance analysis

Prepare the standard cost card per unit of product Jupiter.

Prepare the standard cost card per unit of product Jupiter.

Standard Cost Card per Unit of Product Jupiter:

Component Cost
Sales price GH¢12.00
Materials cost 4.29kg @ GH¢1.453 per kg = GH¢6.23
Labour cost 2.62 hours @ GH¢2.15 per hour = GH¢5.63
Contribution GH¢0.14
  • 12 Marks

MA – May 2018 – L2 – Q5a – Standard Cost Variances Analysis

Calculate standard cost variances including sales price, material price, and labour efficiency.

The following information relates to product Jupiter, produced by Bfield Ltd during January. This represents the information that remains after a fire in the premises destroyed most of the accounting records.

Variances GH¢
Selling price 50,000 A
Materials price 28,500 F
Materials usage 7,500 A
Labour rate 18,700 F
Labour efficiency 20,400 A

Actual data

  • Sales (25,000 units at GH¢10) = GH¢250,000
  • Materials costs (112,500 kg at GH¢1.20) = GH¢135,000
  • Labour costs (75,000 hrs. at GH¢1.9) = GH¢142,500

There was no opening or closing inventories.

Required:
Calculate the following:
i) Standard selling price per unit; (3 marks)
ii) Standard cost of material per kilogram; (3 marks)
iii) Standard kilograms of materials required per unit; (2 marks)
iv) Standard labour rate per hour; (2 marks)
v) Standard hours of labour required per unit. (2 marks)

i) Standard selling price per unit

  • Sales price variance:

25,000 units should have brought in (25,000 x S) =25,000

Variance=50,000A

Calculation: 25,000×S=GH¢300,000

S=GH¢300,000/25,000=GH¢12

ii) Standard cost of material per kilogram

Material price variance:

112,500 kg should have cost (112,500 x C)=112,500C

112,500 kg did cost=135,000

Variance=28,500F

Calculation:

112,500×Cost=GH¢163,500

C=GH¢163,500/112,500=GH¢1.453

iii) Standard kilograms of materials required per unit

  • Material usage variance:

25,000 units should have used (25,000 x Kg)=25,000Kg 

 25,000 units did use=112,500

Variance=7,500A

Calculation:

25,000×Kg=107,338

iv) Standard labour rate per hour

Labour rate variance:

75,000 hours should have cost (75,000 x C)=75,000C

Variance=18,700F

Calculation:

75,000×Cost=GH¢161,200

C=GH¢161,200/75,000=GH¢2.15

v) Standard Labour hours per unit of product

Labour efficiency variance:

25,000 units should have used (25,000 x Hrs)=25,000Hrs

25,000 units did use=75,000

Calculation:

Hrs.=65,512/25,000=2.62hrs

 

  • 12 Marks

MA – May 2018 – L2 – Q3a – Standard Costing and Variance Analysis

Prepare profit statements for April and May using standard costing and absorption costing methods.

a) Resol Ltd commenced trading on 1 April 2011 making the product Resol. The standard cost sheet for Resol is as follows:

The fixed production overhead figure has been calculated on the basis of a budgeted normal output of 24,000 units per annum. Fixed Sales and Administration costs are estimated at GH¢24,000 per annum. You may assume that all budgeted fixed expenses are incurred evenly over the year.

The sales price is GH¢35.00 and the actual number of units produced and sold was as follows:

April May
Production – units 2,000 2,500
Sales – units 1,500 3,000

Required:
Prepare a profit statement for each of the months April and May using:

  • Standard costing
  • Absorption costing

(i) Standard Costing Profit Statement

April May
Sales 52,500 105,000
Cost of Sales 7500
Opening Stock 30,000 37,500
Variable production cost (7,500)
Closing Stock 22,500 45,000
Contribution 30,000 60,000
Fixed production Overheads (10,000) (10,000)
Sales & Administration Overheads (2,000) (12,000)
Profit for period 18,000 48,000

(ii) Absorption Costing Profit Statement

April May
Sales 52,500 105,000
Cost of Sales
Opening Stock 0 10,000
Production cost (total) 40,000 50,000
Closing Stock (10,000) 0
Gross Profit 22,500 45,000
Sales & Administration Overheads (2,000) (2,000)
Over-absorbed fixed production overhead 0 (2,500)
Profit for period 20,500 45,500

Workings:

Calculation of Unit Costs

Cost Component GH¢
Direct Materials 8.00
Direct Labour 5.00
Variable Overhead 2.00
Variable Production Cost 15.00
Fixed Overhead 5.00
Total Production Cost 20.00

Closing Stock Calculations

Month Units Standard Costing Absorption Costing
April 500 GH¢7,500 GH¢10,000

Fixed Production Overhead

Calculation GH¢
Budgeted production (24,000 units) 120,000
Fixed overhead per month 10,000
Over absorption of fixed production overhead 2,500

Fixed Sales and Administration Cost

Calculation GH¢
Total annual cost 24,000
Monthly cost 2,000

 

  • 5 Marks

MA – Nov 2020 – L2 – Q4b – Standard Costing and Variance Analysis

Discuss the advantages and disadvantages of using standard costing in cost management.

b) Explain THREE (3) advantages and TWO (2) disadvantages of standard costing.

Advantages of Standard Costing:

  1. Improved Cost Control: Standard costing enables better cost control by setting predefined cost standards and highlighting variances, which helps in identifying areas that require managerial attention.
  2. Enhanced Planning and Decision Making: It provides a basis for budgeting and helps in forecasting future costs, making it easier for management to plan and make informed decisions.
  3. Simplified Inventory Valuation: Standard costing simplifies inventory valuation by applying standard costs to inventory, avoiding the need to calculate varying actual costs for each unit, which can be complex and time-consuming.

Disadvantages of Standard Costing:

  1. Controversial Materiality Limits for Variances: Determining materiality limits for variances can be subjective and may lead to disagreements. The judgment involved in setting these limits can create inconsistencies in reporting.
  2. Potential for Low Morale: The focus on unfavorable variances can demotivate employees if their good performance is not equally recognized, leading to potential issues with morale.
  • 10 Marks

MA – Nov 2020 – L2 – Q3b – Standard Costing and Variance Analysis

Calculate various variances including sales volume contribution, price, mix, yield, labour rate, labour efficiency, and idle time variances for Zip Ltd.

b) Zip Ltd, a premium food manufacturer, is reviewing its operations for a three-month period for 2019. The company operates a standard marginal costing system and manufactures one product, ZP, for which the following standard revenue and cost data per unit of product is available:

  • Selling price: GH¢12.00
  • Direct material A: 2.5 kg at GH¢1.70 per kg
  • Direct material B: 1.5 kg at GH¢1.20 per kg
  • Direct labour: 0.45 hours at GH¢6.00 per hour
  • Fixed production overheads for the three-month period were expected to be GH¢62,500.

Actual data for the three-month period was as follows:

  • Sales and production: 48,000 units of ZP were produced and sold for GH¢580,800
  • Direct material A: 121,951 kg were used at a cost of GH¢200,000
  • Direct material B: 67,200 kg were used at a cost of GH¢84,000
  • Direct labour: Employees worked for 18,900 hours, but 19,200 hours were paid at a cost of GH¢117,120
  • Fixed production overheads: GH¢64,000

Required: Calculate the following variances:

i) Sales volume contribution and sales price variances
ii) Price, mix, and yield variances for each material
iii) Labour rate, labour efficiency, and idle time variances

i) Sales Volume Contribution and Sales Price Variances

Variance Calculation Result (GH¢)
Sales Volume Contribution Variance (Budgeted sales volume – Actual sales volume) * Standard contribution per unit (2,000 units) * GH¢3.25 = (GH¢6,500) (A)
Sales Price Variance (Actual selling price per unit – Standard selling price per unit) * Actual units sold (GH¢580,800 – GH¢576,000) = GH¢4,800 (F)

ii) Price, Mix, and Yield Variances for Each Material

  • Material A:
    • Price Variance: (Standard cost – Actual cost) = (GH¢207,317 – GH¢200,000) = GH¢7,317 (F)
    • Mix Variance: (Actual quantity – Standard quantity) * Standard cost per kg = 3,732 kg * GH¢1.70 = (GH¢6,344) (A)
    • Yield Variance: (Standard quantity for actual output – Actual quantity) * Standard cost per unit = 712 units * GH¢6.05 = GH¢4,308 (F)
  • Material B:
    • Price Variance: (Standard cost – Actual cost) = (GH¢80,640 – GH¢84,000) = (GH¢3,360) (A)
    • Mix Variance: (Actual quantity – Standard quantity) * Standard cost per kg = 3,732 kg * GH¢1.20 = GH¢4,478 (F)
    • Yield Variance: (Standard quantity for actual output – Actual quantity) * Standard cost per unit = 712 units * GH¢6.05 = GH¢4,310 (F)

iii) Labour Rate, Labour Efficiency, and Idle Time Variances

Variance Calculation Result (GH¢)
Labour Rate Variance (Standard rate – Actual rate) * Actual hours paid (GH¢115,200 – GH¢117,120) = (GH¢1,920) (A)
Labour Efficiency Variance (Standard hours for actual output – Actual hours worked) * Standard rate per hour (2,700 hours) * GH¢6 = GH¢16,200 (F)
Idle Time Variance (Idle hours * Standard rate per hour) (300 hours * GH¢6) = (GH¢1,800) (A)
  • 5 Marks

MA – May 2021 – L2 – Q4c – Standard costing and variance analysis Series

Explain two approaches used in establishing standard costs within an organization.

c) State and explain TWO (2) approaches that can be used in setting a standard within an organisation.

(5 marks)

 

Approaches to Establishing Standard Costs:

  1. Historical Records:
    This approach uses the company’s past operational data, including the purchase and use of materials and labor, to set current standard costs. The advantages include low cost, use of actual company data, and providing a reference for future improvements. However, this approach might incorporate past inefficiencies into current standards, and it may not be relevant if the production process changes or new products are introduced.
  2. Engineering Studies:
    This approach involves detailed studies of each production operation to establish standard costs based on observed and recorded activities. Engineering studies are future-oriented, aiming to avoid incorporating past inefficiencies into standards and accommodating expected changes like process alterations or product redesigns. While this approach can improve reliability, it is time-consuming and expensive, requiring input from various departments such as production, human resources, sales, and finance.

 

  • 10 Marks

MA – April 2022 – L2 – Q3a – Standard costing and variance analysis

Prepare a standard cost card and calculate variances for Plytimba's recent financial period.

Plytimba manufactures high-quality wooden chairs using odum sourced from sustainable forests. The company began trading two years ago having identified a niche market for the product.

During the year, Plytimba was forced to purchase wood from a different company as the usual supplier did not have sufficient stock available. The company operates a standard variable costing system and details relating to the most recent financial period are shown below.

Budgeted Information:

  • Production in units: 134,400
  • Direct materials: 10,080 square metres odum wood = GH¢282,240
  • Direct labour: 33,600 hours = GH¢483,840
  • Variable production overhead (based on direct labour hours): GH¢225,792
  • Fixed production overhead: GH¢29,200

Actual Information:

  • Production in units: 135,000
  • Direct materials: 10,800 square metres odum wood = GH¢300,240
  • Direct labour hours: 27,000 hours = GH¢486,000
  • Variable production overhead: GH¢194,400
  • Fixed production overhead: GH¢30,150

Required:

i) Prepare a Standard Cost Card for one wooden chair. (4 marks)

ii) Calculate SIX (6) variances in as much detail as the information above permits. (6 marks)

i) Standard Cost Card for One Wooden Chair:

Cost Component Per Unit Calculation Per Unit Cost (GH¢)
Direct Materials 10,080 sq. m / 134,400 units = 0.075 sq. m per unit 0.075 x 28 (GH¢/sq. m) = 2.10
Direct Labour 33,600 hrs / 134,400 units = 0.25 hrs per unit 0.25 hrs x 14.40 (GH¢/hr) = 3.60
Variable Overhead 0.25 hrs x (225,792 / 33,600 hrs) = 1.68 1.68
Total Cost Per Unit 7.38

ii) Variances Calculation:

  1. Direct Material Price Variance:
  2. Direct Material Usage Variance:
  3. Direct Labour Rate Variance:
  4. Direct Labour Efficiency Variance:
  5. Variable Overhead Expenditure Variance:
  6. Variable Overhead Efficiency Variance:
  7. Fixed Production Overhead Expenditure Variance: BFO – AFO=29,200−30,150=950 A

Take control of your business data with insight and in-depth understanding by taking this course. 

Services

Contact Info

  • +233203701923
    +233543919232
  • info@noohrabusiness.com

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope